How is 401k distribution in divorce settlement handled?

Question:

How is 401k distribution in divorce settlement handled?

Answer:

During a person's time in the workforce generally they invest and save in a 401(k) retirement account of some sort. As that builds up a sizeable amount of money it is set in the back of person's mind for the day they retire and will depend on it. However, in some cases, the final distribution of that money can be interrupted if a divorce enters the picture.

Former spouses and other dependents may be entitled to a portion of your 401(k) assets when you go through a divorce. In cases such as this, the court issues a Qualified Domestic Relations Order (QDRO) as part of the divorce settlement. This order defines how 401k distribution in divorce settlement will occur. It effectively names someone else, not you, as recipient(s) of your 401(k) assets. This other person is called the "alternate payee" and is generally your spouse, or former spouse, or your child. The QDRO is the vehicle through which your divorce settlement assets will be distributed in the form of alimony payments, child support and property rights payments.

On the positive side, the money that is taken from your account in the processing of the QDRO will not be subject to the 10% early withdrawal federal income tax penalty. And this will hold true regardless of your age - meaning you and the alternate payee can both be younger than 59 1/2 years old. This, however, only works out properly if your QDRO has been properly established; otherwise you will be subject to the 10% tax penalty. Therefore you will want to discuss the QDRO with your plan administrator and ensure that the QDRO is set up properly. The last thing you will want to face during a divorce and distribution of your retirement funds is a tax burden as well.